Fiscal Drag Tax Strategy Will Stifle Business Growth

December 2, 20220

The Autumn Statement lacked vision, contained no confidence boosters and didn’t incentivise small business growth, says an expert panel on the economy.

“There were some good things he could have done but didn’t do. Bad things he could have done and fortunately didn’t do and there are a bunch of boring things, which he did do.”

So said Dan Neidle of Tax Policy Associates on Chancellor Jeremy Hunt’s Autumn Statement, as part of the keynote panel on Day Two of the AccountingWEB LIVE Expo. The “boring things” in question were, essentially, raising taxes through fiscal drag.

The danger with this strategy, according to Neidle, is that it creates the potential for a major fiscal crisis in a couple of years, when it comes to the scheduled public sector cuts which he said: “I expect no government would actually want to do.”

Instead, Neidle suggests the Chancellor should introduce changes to capital gains tax, inheritance tax, reform stamp duty and council tax.

“Any one of those has the potential to make the tax system fairer and more rational and raise money,” he said.

Lacking Vision

Panellist Emma Jones, founder of Enterprise Nation, which represents small businesses with fewer than 10 employees, told the audience: “Job number one for the Chancellor on that day was to calm the markets, which is exactly what he did.”

But she has said that the Autumn Statement lacks the vision for a brighter future that small businesses needed to see. Expanding on that point, Jones said: “What it wasn’t, however, was a statement for small business… I don’t need to tell this audience but 6m plus small businesses operating in the UK have had a tough three years.

“We desperately want to see a vision, we want to see economic hope. We want to see a plan where this government says okay, we’ve got tricky times and challenges ahead. We need small businesses and entrepreneurs to be fit to help us get through that. So let’s give you this kind of optimistic vision of how we’re going to do it. That cheerleading was what we wanted to see.”

Deliberately Halting Growth

With the VAT registration threshold frozen at £85,000 since the last increase in 2017, more business should be pulled in through fiscal drag. However, Neidle said that many growing businesses halt their growth before they hit £85,000.

“There’s been some recent academic analysis that shows, I think convincingly, that’s not evasion. It’s not people failing to report their revenue. They are deliberately holding their growth because they can’t face a 20% charge on their sales. That is a huge problem. And that requires really serious policy focus.”

Jones said that VAT was discussed as an important issue impacting growth when she met with Kevin Hollinrake, the new Parliamentary Under Secretary of State at the Department for Business, Energy and Industrial Strategy last week.

“He has personally heard a lot of businesses in his constituency get up to about £80,000 and say, ‘I’m not going any further.’ A couple of businesses he spoke to said they closed down for the winter so that their revenue doesn’t go above the VAT threshold,” she said, adding: “It is actively being looked at.”

Buckling Down

All the signs are that businesses will not be heading into 2023 with a growth mentality but are buckling down and conserving cash. Jones said high-street banks are telling her that they are already seeing a reduction in overdraft use, and cash liquidity is very high. “Small businesses are nervous, they’re tired, they’re keeping hold of their cash,” she said.

More than anything else, businesses and the economy need a sustained period of stability, said Caroline Plumb, who runs Gravita, a top 40 accountancy firm, which recently rebranded from Jeffreys Henry.

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